PROSPERR.IO

A few years into my career at the Income Tax Department, I came across a case that I still think about occasionally.

A businessman in his fifties doing reasonably well, running a trading firm had figured out what he thought was a clean arrangement. He owned the business. His wife had no income of her own. So he started paying her a salary. A generous one. The idea was simple: split the income, reduce the slab, pay less tax overall. Perfectly logical, on the surface.

What he hadn't accounted for was Section 64(1)(ii).

His wife had no technical qualifications relevant to the business. She wasn't a trained accountant, not a logistics expert, not someone whose professional background could justify that salary on merit. She was being paid because she was his wife and because the tax math worked out favourably that way.

The Assessing Officer clubbed the entire salary with his income. The tax advantage evaporated. And then came the interest on the differential.

He wasn't a dishonest man. He just didn't know the rules. That's what makes clubbing provisions the kind of thing every earning individual in India needs to genuinely understand, not skim over, not assume their accountant has handled.

What Clubbing Actually Is — And Why It Exists

The Income Tax Act has a concept called clubbing of income. What it means, in plain terms, is this: under certain conditions, income that legally belongs to one person, your spouse, your minor child, or even a third party gets added to your income for tax purposes. You pay tax on it. Not them.

Section 64 of the Act is where this lives. And the provisions specifically dealing with spouses are detailed, sometimes counterintuitive, and very much enforced.

The reason Parliament put these rules here is straightforward. Without them, a high-earning individual could simply transfer wealth or income-generating assets to a non-earning or lower-earning spouse, split the family's effective income across two lower tax slabs, and cut the tax bill significantly. Section 64 closes that door. Or most of it, anyway.

When Your Spouse's Salary Gets Clubbed With You — Section 64(1)(ii)

Let's take the most commonly encountered situation first.

You have a substantial interest in a business or company. Your spouse works there and draws a salary. Under Section 64(1)(ii), that salary gets clubbed with your income not your spouse's unless one specific condition is met.

What counts as a substantial interest? If the entity is a company, you or your relatives hold shares carrying at least 20% of the voting power. If it's any other kind of concern, a partnership firm, a proprietary business, you or your relatives are entitled to at least 20% of its profits. Either way, 20% is the threshold.

And "relative" here follows the definition in Section 2(41): husband, wife, brother, sister, or any lineal ascendant or descendant. So if your father holds 15% and you hold 10%, you're collectively at 25%, and the substantial interest test is met.

Now, the exception. If your spouse genuinely has technical or professional qualifications, and the salary they're drawing is attributable solely to that professional expertise not to the marital relationship then clubbing doesn't apply.

A practical example. Mr. A holds 25% of the voting power in a company through his shareholding. His wife, Mrs. A, is employed by the same

company at ₹10 lakh per year. Two scenarios:

In the first, Mrs. A has no relevant qualifications. She handles general administration. The Assessing Officer is unlikely to accept that the salary is merit-based. The ₹10 lakh gets clubbed with Mr. A's income.

In the second, Mrs. A is a qualified chartered accountant and is working as the company's CFO. Her salary is commensurate with the role and her credentials. Here, the exception applies. The income is hers and is taxed as hers.

The distinction matters enormously, and the burden of demonstrating that the salary is merit-based falls on the taxpayer. Not on the Department to disprove it.

One More Layer: Whose Income Does the Clubbing Land On?

Say both spouses earn independently. Husband earns ₹15 lakh. The wife earns ₹10 lakh from her own business, a business in which her husband holds a substantial interest. Which of them does her business income get clubbed with?

Explanation 1 to Section 64(1) answers this. The income gets clubbed with the spouse who has the higher income excluding the clubbed income itself from that comparison.

So in this case: husband's base income is ₹15 lakh, wife's base income (other than the clubbed amount) is whatever remains. The wife's business income clubs with the husband, because his independent income is higher.

One more thing this Explanation makes clear: once the decision is made about whose income to club it with, that continues in future years unless the Assessing Officer decides otherwise. It's not re-evaluated fresh every year based on who's earning more in a given year.

Transferring Assets to Your Spouse Section 64(1)(iv)

This is where things get very interesting for people who think they're doing smart estate planning or financial management within the family.

Section 64(1)(iv) says: if you transfer any asset to your spouse without adequate consideration, any income arising from that asset gets clubbed with your income.

Let's say you transfer ₹10 lakh to your wife without receiving anything of equivalent value in return. She puts it in a fixed deposit. The FD earns ₹80,000 in interest during the year. That ₹80,000 is your income for tax purposes, not hers. You pay tax on it.

There are two exceptions. One if the transfer was made in connection with a formal agreement to live apart (separation or divorce proceedings). Two if adequate consideration was exchanged. "Adequate consideration" means fair market value, not a token amount. Transferring property worth ₹50 lakh in exchange for ₹1,000 doesn't qualify.

This provision has no time limit attached to it. The clubbing continues as long as the marriage subsists and as long as the transferred asset continues to generate income in the hands of the spouse. It doesn't expire after five years or after the asset has grown significantly beyond the original transfer value.

When the Spouse Invests the Transferred Money in a Business

This is where the calculation gets more layered, and where a lot of people including some accountants make errors.

Say you transfer ₹10 lakh to your wife. She uses it as part of her capital to start a business or contribute to a partnership firm. The total capital she puts in is ₹40 lakh , ₹10 lakh from you, ₹30 lakh of her own. The business makes ₹8 lakh that year.

You don't club the entire ₹8 lakh. Only the proportionate portion attributable to the transferred funds is clubbed. The calculation is based on the ratio of transferred capital to total capital as it stood on the first day of the financial year.

₹10 lakh divided by ₹40 lakh is 25%. So 25% of ₹8 lakh which is ₹2 lakh gets clubbed with your income. The remaining ₹6 lakh is your wife's income, taxed as hers.

Another example. You transfer ₹10 lakh to your wife on April 1. She uses it to join a partnership firm, contributing ₹50 lakh in total ₹10 lakh from you, ₹40 lakh her own. The firm makes ₹30 lakh that year, and her share of profits is ₹6 lakh.

The proportion of transferred capital to her total capital contribution is ₹10 lakh divided by ₹50 lakh 20%. So 20% of her ₹6 lakh profit share ₹1.2 lakh gets clubbed with your income. The rest is hers.

The key date in both cases is April 1st, the first day of the financial year. Whatever the capital ratio looks like on that date is what governs the clubbing calculation for the entire year.

The Third-Party Route — Section 64(1)(vii)

Some people, when they learn about the direct transfer provisions, try to get creative. Instead of transferring assets directly to the spouse, they transfer them to a trust, or to another entity, with an arrangement that the income benefits the spouse.

Section 64(1)(vii) anticipated exactly this.

If you transfer assets directly or indirectly to any person or association of persons, and the income from those assets is intended for the immediate or deferred benefit of your spouse, that income is still clubbed with yours.

The example the law itself contemplates: Mr. C transfers ₹5 lakh worth of assets to a trust. The trust deed specifies that the income from those assets will be paid as an allowance to his wife. The trust structure doesn't insulate him. The income comes back to him for tax purposes.

Indirect transfers, charitable structures used with a marital benefit element, arrangements through friends or associates these all fall within the ambit of this provision if the ultimate beneficiary is the spouse.

HUF Partition and Clubbing — Section 64(2)

There's one more scenario that affects families operating through a Hindu Undivided Family.

If an individual converts their personal, self-acquired property into HUF property, and that HUF property is later partitioned, the income received by the spouse from the partitioned property gets clubbed back with the individual's income.

The logic is the same as the other provisions the conversion itself was without consideration. You turned your own property into family property, and when it was partitioned, your spouse got a share of something that originated from you. So the income from that share remains yours for tax purposes.

This catches people off guard, particularly in traditional family setups where HUF management and partitioning is treated as a private family matter with no tax dimension. It very much has a tax dimension.

What This Means in Practice

The short version of all of this is: the tax code does not allow income to be shifted to a spouse simply by moving money or assets around, unless genuine consideration is exchanged or genuine professional merit is established.

Does this mean you can never transfer money to your spouse? No. You can gift your spouse funds freely; the clubbing rules don't impose any limit or penalty on the transfer itself. What they do is neutralize the tax benefit you might hope to get from that transfer. The income still gets taxed in your hands. So the tax planning motivation behind the transfer, if that's what it was, simply doesn't work.

Where it does work is when the spouse genuinely contributes professionally through qualifications, skills, and a demonstrably merit-based role. The exception under Section 64(1)(ii) is real and available. It just has to be real, not manufactured.

I've seen families plan this well. A spouse with a genuine background in finance or operations, hired at a salary that matches industry norms for the role, with clear documentation of qualifications and responsibilities that holds up. It should hold up.

What doesn't hold up: a spouse given a managerial title, no defined work, and a salary that happens to be exactly the amount needed to push one partner below a tax slab threshold.

The Department has seen enough of those to know what they look like.

The Takeaway

Section 64 is one of those provisions that feels restrictive until you understand why it's there and then it makes complete sense. Income earned within a family unit isn't untaxed income. It's taxed in the hands of whoever genuinely earned it, or whoever transferred the asset that generated it, depending on the circumstances.

Know the rules. If you're paying a salary to your spouse from a business you substantially control, make sure the salary is genuinely merit-based and properly documented. If you're transferring assets to your spouse, understand that the income from those assets stays in your tax hands. If you're using a third party or trust arrangement that benefits your spouse, know that Section 64 reaches through those structures too.

Plan with that knowledge, not around it.

Prosperr.io helps you manage your income tax the right way — no guesswork, no surprises. Book a free tax assessment call here.

Disclaimer: This article reflects the author's personal understanding of the Income Tax Act, 1961 and relevant provisions. It is intended for general informational purposes only and is not professional legal or tax advice. Please consult a qualified tax practitioner for matters specific to your situation.